News

Summary: Euro-zone households more optimistic in April; back to pre-pandemic value; index above consensus expectation, long-term average; major euro-zone bond yields up a touch.

EU consumer confidence plunged during the GFC and again in 2011/12 during the European debt crisis. After bouncing back through 2013 and 2014, it fell back significantly in late 2018 but only to a level that corresponds to significant optimism among households. Following the plunge which took place in April 2020, a recovery began a month later, with household confidence returning to above-average levels in March.

The April survey conducted by the European Commission indicated its Consumer Confidence index increased to -8.1, a reading comparable with pre-pandemic values at the end of 2019. The reading was above -11.5 which had been generally expected and higher than March’s figure of -10.8. The average reading since the beginning of 1985 is -11.7.

Sovereign bond yields crept up in major European bond markets on the day. By the end of it, German and French 10-year bond yields had each ticked up 1bp to -0.25% and -0.01% respectively.

Summary:  Leading index increases in March; indicators point to “strong” consumer spending; reading implies annual GDP growth to rise to around 5.75% during second, third quarter; RBA’s GDP forecasts expected to be exceeded.

Westpac and the Melbourne Institute describe their Leading Index as a composite measure which attempts to estimate the likely pace of Australian economic growth over the next three to six months. After reaching a peak in early 2018, the index trended lower through 2018 and 2019 before plunging to recessionary levels in the second quarter of 2020. Subsequent readings have been markedly higher.

The latest reading of the six month annualised growth rate of the indicator increased in March, from February’s revised figure of +3.00% to +3.29%.

“The reopening of the economy, cashed up households and an eleven-year high in Consumer Sentiment all point to strong spending,” said Westpac Chief Economist Bill Evans.

Index figures represent rates relative to trend-GDP growth, which is generally thought to be around 2.75% per annum. The index is said to lead GDP by three to six months, so theoretically the current reading represents an annual GDP growth rate of around 5.75% in the second or third quarters of 2021.

Commonwealth Government bond yields fell across the curve on the day, slightly outpacing falls in US Treasury markets overnight. By the end of the day, the 3-year ACGB yield had lost 2bps to 0.26%, the 10-year yield had shed 5bps to 1.69% while the 30-year yield finished 6bps lower at 2.39%.

The RBA’s February Statement on Monetary Policy forecast GDP for the years ending June 2021 and December 2021 to be 8.0% and 3.5% respectively. Should the RBA’s forecasts prove to be accurate, an increase of just 1.3% in first half is implied. Evans currently expects an increase of 2.4% in the first half and 4.5% for the calendar year.

Summary: US consumer confidence improves in April; University of Michigan index below consensus figure; view of present conditions improve, view of future conditions stable; stimulus spending, low interest rates, vaccinations main drivers; safety issues, inflation expectations hold back views of future.

US consumer confidence started 2020 at an elevated level. However, by March, surveys had begun to reflect a growing uneasiness with the global spread of COVID-19 and its reach into the US. After a plunge in April 2020, household confidence recovered in a haphazard fashion, holding at below-average levels. However, recent surveys suggest optimism may be likely to improve.

The latest survey conducted by the University of Michigan indicates the average confidence level of US households improved in April. The University’s preliminary reading from its Index of Consumer Sentiment registered 86.5, below the generally expected figure of 88.8 abut higher than March’s final figure of 84.9. Consumers’ views of current conditions improved while their expectations regarding future conditions remained stable in comparison to those held at the time of the March survey.

“Consumers in early April reported surging economic growth and strong job gains due to record stimulus spending, low interest rates, and the positive impact of vaccinations,” said the University’s Surveys of Consumers chief economist, Richard Curtin. He noted concerns regarding vaccine safety and “a surge in year-ahead inflation expectations” had held back households’ expectations of the future.

US Treasury bond yields hardly moved on the day. By the close of business, the 2-year yield remained unchanged at 0.15%, the 10-year yield had ticked up 1bp to 1.58% and the 30-year yield also remained unchanged at 2.27%.

More-confident households are generally inclined to spend more and save less; some increase in household spending could be expected to follow. As private consumption expenditures account for a majority of GDP in advanced economies, a higher rate of household spending growth would flow through to higher GDP growth if other GDP components did not compensate.

Summary: US output expands in March; rise less than expected figure; warm weather, supply chain issues blamed; capacity utilisation rate rises, back to December level.

The Federal Reserve’s industrial production (IP) index measures real output from manufacturing, mining, electricity and gas company facilities located in the United States. These sectors are thought to be sensitive to consumer demand and so some leading indicators of GDP use industrial production figures as a component. US production collapsed through March and April of 2020 and then began recovering in subsequent months.

According to the Federal Reserve, US industrial production grew by 1.4% on a seasonally adjusted basis in March. The result was substantially less than the 3.0% increase which had been generally expected but a marked turnaround from February’s 2.6% contraction after it was revised down from -2.2%. On an annual basis, the expansion rate increased from February’s revised figure of -4.8% to +1.0%.

NAB Head of FX strategy within its FICC division Ray Attrill attributed the failure to fully reverse February’s contraction to “a sharp fall in utility output as the weather dramatically warmed up and auto production impacted by supply shortages” of computer chips.

The report was released on the same day as March’s retail sales numbers and, despite the solid figures, longer-term US Treasury bond yields moved noticeably lower. By the end of the day, the 10-year Treasury yield had lost 5bps to 1.58% and the 30-year yield had shed 4bps to 2.28%. The 2-year yield remained unchanged at 0.15%.

Summary:  US retail sales jumps in March; rise significantly larger than expected figure; stimulus payments, plus multiple other factors behind strength; rises in all retail categories; “vehicles and parts” the largest influence.

US retail sales had been trending up since late 2015 but, commencing in late 2018, a series of weak or negative monthly results led to a drop-off in the annual growth rate below 2.0% by the end of that year. Growth rates then increased in trend terms through 2019 and into early 2020 until pandemic restrictions sent it into negative territory. A “v-shaped” recovery then took place which was followed by some short-term spikes as federal stimulus payments hit households.

According to the latest “advance” sales numbers released by the US Census Bureau, total retail sales jumped by 9.8% in March. The rise was noticeably higher than the 5.0% increase which had been generally expected and it contrasted with February’s 2.7% fall after it was revised up from -3.0%. On an annual basis, the growth rate increased from February’s revised figure of 6.7% to 27.7% as the pandemic-induced reduction in spending from March 2020 temporarily raised annual growth rates.

“Strength in spending was broad-based, supported by the USD$1,400 stimulus cheques to an estimated 85% of American adults, an already-high savings rate, a rapidly improving labour market, successful vaccination program and rebound from weather-related weakness in February,” said ANZ economist Kishti Sen.

The report was released on the same day as February’s industrial production numbers and, despite the solid figures, longer-term US Treasury bond yields moved noticeably lower. By the end of the day, the 10-year Treasury yield had lost 5bps to 1.58% and the 30-year yield had shed 4bps to 2.28%. The 2-year yield remained unchanged at 0.15%.

All categories recorded higher sales over the month. The “Motor vehicle & parts dealers” segment provided the largest single influence on the overall result, rising by 15.1% for the month and by 71.1% for the year. Several other segments also made larger-than-normal contributions to the out-sized result.

Summary: Euro-zone industrial production drops in February; contraction less than expected; annual growth rate back below zero; French, German car production particularly weak; expansion in only one of euro-zone’s four largest economies.

Following a recession in 2009/2010 and the debt-crisis which flowed from it, euro-zone industrial production recovered and then reached a peak four years later in early 2016. Growth rates then fluctuated through 2016/2017 before beginning a steady and persistent slowdown from the start of 2018. That decline was transformed into a plunge in March and April of 2020 but subsequent months in 2020 produced an almost-complete recovery.

According to the latest figures released by Eurostat, euro-zone industrial production dropped by 1.0% in February on a seasonally-adjusted and calendar-adjusted basis. The contraction was smaller than the 1.3% contraction which had been generally expected but in contrast with January’s 0.8% expansion. On an annual basis, the calendar-adjusted growth rate fell from January’s rate of +0.1% to -1.6%.

“The weakness reflected large falls seen in France and Germany that month as car production was particularly weak owing to supply chain disruptions for semiconductors,” said ANZ analyst Rahul Khare. However, he noted March purchasing managers indices had pointed “to a strong bounce back in production” and thus “weakness is likely to prove temporary.”

German and French 10-year sovereign bond yields moved higher on the day. By the close of business, German and French 10-year yields had each gained 3bps to -0.26% and 0.00% respectively.

Industrial production growth expanded in only one of the euro-zone’s four largest economies. Germany’s production contracted by 1.8% while the comparable figures for France, Italy and Spain were -4.8%, +0.2% and zero respectively.

Summary: Household sentiment improves again in April; highest reading since 2010; sentiment index well above long-term average; four of five sub-indices higher; unemployment index higher.

After a lengthy divergence between measures of consumer sentiment and business confidence in Australia which began in 2014, confidence readings of the two sectors converged again around July 2018. Both readings then deteriorated gradually in trend terms, with consumer confidence leading the way. Household sentiment fell off a cliff in April 2020 but, after a few months of to-ing and fro-ing, it then staged a full recovery.

According to the latest Westpac-Melbourne Institute survey conducted in early April, household sentiment has improved again, taking it to an elevated level. The Consumer Sentiment Index rose from March’s reading of 111.8 to 118.8.

“This is an extraordinary result. The Index is now at its highest level since August 2010 when Australia’s post-GFC rebound and mining boom were in full swing,” said Westpac chief economist Bill Evans.

Any reading of the Consumer Sentiment Index above 100 indicates the number of consumers who are optimistic is greater than the number of consumers who are pessimistic. The latest figure is substantially above the long-term average reading of just over 101.

Long-term Treasury bond yields fell following noticeable falls in US Treasury bond yields overnight. By the close of business, the 10-year ACGB yield had dropped by 7bps to 1.71% while the 20-year yield finished 6bps lower at 2.42%. The 3-year yield remained unchanged at 0.26%.

Summary: US CPI up solidly in March; just above expectations; “core” rate up, slightly more than expected; “early signs” of firming inflation components; headline rate again driven by higher fuel prices; financial markets “embracing” Fed rationale of “transitory effects”; New York Fed measure above 2%.

The annual rate of US inflation as measured by changes in the consumer price index (CPI) halved from nearly 3% in the period from July 2018 to February 2019. It then fluctuated in a range from 1.5% to 2.0% through 2019 before rising above 2.0% in the final months of that year. Substantially lower rates were reported from March 2020 to May 2020 but subsequent reports indicated consumer inflation has largely returned to pre-pandemic levels.

The latest CPI figures released by the Bureau of Labor Statistics indicated seasonally-adjusted consumer prices rose by 0.6% on average in March. The result was slightly above the 0.5% increase which had been generally expected and double February’s revised increase of 0.3%. On a 12-month basis, the inflation rate accelerated from February’s reading of 1.7% to 2.6%.

“Headline” inflation is known to be volatile and so references are often made to “core” inflation for analytical purposes. Core inflation, a measure of inflation which strips out the volatile food and energy components of the index, increased by 0.3% on a seasonally-adjusted basis for the month. The result was more than the expected 0.2% and higher than February’s 0.1% increase. The annual rate accelerated after slowing in the previous two months, rising from 1.3% to 1.6%.

“There are thus some early signs of a firming in key inflation components, but it will require more than one month’s data for markets to react. For now, the Fed will be relaxed as the inflation spike is within their forecast profile,” said ANZ economist Adelaide Timbrell.

US Treasury bond yields lost ground on the day. By the close of business, the 2-year yield had slipped 1bp to 0.15%, the 10-year yield had shed 5bps to 1.62% while the 30-year yield finished 4bps lower at 2.30%.

In terms of US Fed policy, expectations of any change in the federal funds range over the next 12 months remained fairly soft. April 2022 futures contracts implied an effective federal funds rate of 0.10%, a few basis points above the spot rate.

Summary: Business conditions improve in March, hits record high; confidence slips but still elevated; impact of end of JobKeeper likely to be “short and limited”; broadly based across states, industry groups; “ongoing strength” expected; capacity usage rate increases again; implies further falls in jobless rate.

NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s indices then began to slip, declining to below-average levels by the end of 2018. Forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 and the indices trended lower, hitting a nadir in April 2020 as pandemic restrictions were introduced. Conditions have improved markedly since then and NAB’s indices are both back at elevated levels.

According to NAB’s latest monthly business survey of over 400 firms conducted over the second half of March, business conditions improved. NAB’s conditions index registered 25, a record high, and considerably higher than February’s revised reading of 17.

Business confidence slipped modestly and NAB’s confidence index declined from February’s revised reading of 18 to 15. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences have appeared in the past from time to time.

“The March NAB business survey confirms our expectations that the impact of the end of JobKeeper on the economic recovery will be short and limited and gives us more confidence in a strengthening business investment outlook,” said ANZ senior economist Catherine Birch.

Commonwealth Government bond yields increased on the day, rising more than their US counterparts had overnight. By the end of the day, the 2-year ACGB yield had added 2bps to 0.26%, the 10-year yield had gained 4bps to 1.78% while the 20-year yield finished 5bps higher at 2.48%.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained fairly stable. At the end of the day, contract prices implied the cash rate would inch up slowly to around 0.11% by July 2022.

Summary: Prices received by producers jump in March; double expected figure; smaller “core” PPI increase; US Fed expects rises to be transitory; rise in good prices attributable to higher energy prices.

Around the end of 2018, the annual inflation rate of the US producer price index (PPI) began a downtrend which continued through 2019. Months in which producer prices increased suggested the trend may have been coming to an end, only for it to continue, culminating in a plunge in April 2020. Figures returned to “normal” towards the end of the year and annual rates are now above average.

The latest figures published by the Bureau of Labor Statistics indicate producer prices jumped by 1.0% after seasonal adjustments in March. The increase was double the 0.5% rise that had been generally expected and double February’s 0.5%. On a 12-month basis, the rate of producer price inflation after seasonal adjustments increased from 2.8% to 4.3%.

PPI inflation excluding foods and energy rose by 0.7% after recording a 0.2% increase in February and a 1.2% increase in January. The annual rate accelerated again, this time from 2.5% to 3.1%.

Longer-term US Treasury bond yields moved modestly higher on the day. By the close of business, the 10-year yield had gained 3bps to 1.66% and the 30-year yield had added 2bps to 2.33%. The 2-year yield finished unchanged at 0.15%.